Tax trap hits almost 1m over-55s

Almost one million over-55s who took advantage of the right to withdraw from their pension funds between 2015 and 2018 may get stung on tax as a result, according to HMRC.

Tax relief is usually available on pension contributions up to £40,000 per year.

But once an individual makes a flexible withdrawal, they forfeit that relief and cannot pay in more than £4,000 each year without triggering the money purchase annual allowance (MPAA).

The MPAA was designed by HMRC to prevent people avoiding tax on their earnings by putting salary into a pension scheme, taking advantage of the tax relief, and then, to all intents and purposes, withdrawing 25% tax-free.

Pensions experts are critical of the implementation of MPAA, however, arguing that it is confusing, and that the goalposts keep moving.

In 2017, for example, the threshold was reduced from £10,000 to £4,000, with the new limit applying retrospectively.